Friday, September 21, 2007

The Shaky Dollar

...Canadian Loonie Now At Parity

(Dry-as-dust but important as life itself blogging. With an 'easter egg' kicker for those willing to wade through the tough stuff)

Yesterday the Canadian dollar (aka 'Loonie, from the loon depicted on our dollar coin) went over $1.00 US for the first time since November, 1976. Canadian Finance Minister Jim Flaherty pointed out that this was largely due to the US dollar's weakness against all major world currencies, citing the Euro and Australian dollar as examples.

I try to avoid blogging about economics, but I think the time has come. First I'll share what little I know about currencies with you.

From UBC's Sauder School of Business; "Long term movements are driven by fundamental forces, such as purchasing power parity (PPP.) In the short run, exchange rate movements are driven by news and events."

OK, let's talk about the fundamental forces first. A country's currency relies long-term on the value of goods and services that it can trade with other countries. Manufactured goods, raw materials and services. The US has been running an increasing deficit in this regard for a couple of decades now, purchasing $700 BILLION dollars more in 2006 from other countries than those other countries purchase back. This is like every person in the US spending roughly $2,000 more than they earn year after year after year. Not good, obviously. The US trade deficit with Canada alone has been growing to the point that it was $6 Billion a month the last time I looked.

Another fundamental that affects currency values is world commodity prices. The recent rise in oil prices above $80.00/bbl hurt the US dollar and helped the loony, because the US is a net importer of oil, and Canada a net exporter (and the US's largest supplier now, BTW.) For more details, follow the PPP link above, and/or check out The End of Dollar Hegemony from Sans-Culotte's site Feb., '06.

What the UBC calls news and events I call psychological forces. Where the fundamentals represent world trade, in TRILLIONS of dollars, the psychological forces can drive the short-term value of a currency with much smaller numbers. If significant amounts of a currency are purchased in a short time, this will drive the currency's value up with no fundamental reason for it, just because the bid/ask differential is seen to change. A 'paltry' transaction of only a few hundred million dollars can often have a significant effect. There have been recent news items about central banks worldwide buying US treasury bonds to try to keep the dollar from falling, or at least slow that fall. See if you can tell when those injections of cash ocurred on this graph.

If you noticed the short spikes in late July and again in mid August, you're right. If you also noticed the steady decline from early March to the present (a loss of nearly 18% in only 7 months) or the near vertical drop in the last week, well that's the reason for this post.

Why, you might ask, would another country feel the need to artificially prop up the US dollar by purchasing T-bills? Consider the $6 Billion a month in trade surplus that Canada has with the US. For every penny the USD loses, we lose $60 million. It is therefore in our interest to keep your dollar high. Another thing always mentioned when the Loonie gains against the US dollar - it makes our exports more expensive, and can lead to job losses in the manufacturing sector.

Unfortunately, that only applies to countries who are major US trading partners. Others may be tempted to bail on the greenback before it's too late. Reading the financial advisers' websites does not give one much to hope for. Nor is any of this really news. It's been coming for some time, as the dates on these posts shows.

Arab central banks move assets out of dollar - Independent Online ... (March 14, '06)

The Truth Will Set You Free: Swedish Central Bank Dumps Dollar (April 22, '06)

Crisis of the U.S. Dollar System (Oct. 14, '06)

U.S. Dollar Under Threat As Premier Global Reserve Currency (Jul. 31, '07)

Most worrisome is this contemporary report from the Telegraph (UK)
China Threatens 'Nuclear Option' of Dollar Sales
The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.
Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession.
Simon Derrick, a currency strategist at the Bank of New York Mellon, said the comments were a message to the US Senate as Capitol Hill prepares legislation for the Autumn session.

"The words are alarming and unambiguous. This carries a clear political threat and could have very serious consequences at a time when the credit markets are already afraid of contagion from the subprime troubles," he said.
This is of course the payback from the WalMart-ization of the US economy over decades, where the American consumer has sold himself down the river for the price of a dozen pair of tube socks for $10.

(Promised 'kicker'):
Who could have predicted this global loss of confidence in the US economy? Well, for one, Dick 'traitor' Cheney. This news story from over a year ago shows Cheney and his wife to be betting on bad news for the US dollar in their own portfolios. A highlight:
The Cheneys also had between $10 million and $25 million in American Century International Bond (BEGBX, news, msgs). The fund buys mainly high-quality foreign bonds (predominantly in Europe) and rarely hedges against possible increases in the value of the dollar.
By my reckoning that made the Cheneys between $2 and $5 million tax-free. This guy makes Benedict Arnold look downright patriotic.

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